On August 6, Colorado dramatically changed how restrictive covenants will be handled in the state in the context of health care providers and business owners. The law is not retroactive and will not apply to pre-existing agreements.
Under Senate Bill 25-083 (the Law), noncompete agreements are no longer enforceable against health care providers. The Law also changed how noncompete agreements can be enforced against minority owners of businesses following a purchase or sale.
Noncompetes Are No Longer Enforceable Against Health Care Providers[1]
The Law comes three years after Colorado last changed the state’s laws on restrictive covenants. As noted in a previous alert from August 2022, Colorado limits noncompete agreements and nonsolicitation of customer provisions in the employment context. They are only permissible if the individual is compensated at a certain threshold, the covenant is no broader than is reasonably necessary to protect the employer’s interest in protecting trade secrets, and the employer complies with specific advance notice requirements. The new Law makes clear that these exceptions do not apply to noncompete covenants that restrict the practice of medicine, advanced practice registered nursing, or dentistry. In short, the compensation/trade secret exceptions that can support enforceability are not applicable to health care providers. However, the exclusion for noncompete covenants related to a sale of a business does not similarly include an exception for health care providers (and thus, some might remain enforceable in the sale context).
The Law further protects health care providers by declaring that they cannot be restricted from disclosing to a patient to whom they were providing consultation or treatment (before their departure from a practice) information regarding their intent to continue practicing medicine, their new professional contact information, or the fact that the patient has a right to choose their health care provider.
Before the new Law, provisions providing for monetary damages, including damages related to competition were enforceable (but physicians could not be outright restricted from practicing medicine). Even these types of provisions are no longer permitted under the Law.
Noncompetes Related to the Purchase and Sale of a Business
Colorado has long recognized the enforceability of noncompete covenants in the context of the purchase or sale of a business, and the Law recognizes such an exclusion from the restrictions on noncompetes. Under the 2022 law restricting noncompete agreements, the Colorado Legislature included vague language that appeared to uphold this exclusion, but it was not clear as to the purpose or extent of such exclusion. The Law includes improved clarity that noncompete covenants entered into in connection with the sale of a business are generally excluded from the Law’s restrictions and thus can be enforced.
The Law also includes a new provision governing the enforceability of noncompete agreements for certain minority owners. Under prior law, there was no explicit language that differentiated between a majority and minority owner when enforcing a noncompete in the sale of a business. However, the Law offers some clarity and adds some uncertainty about the application of the sale of business exclusion to minority owners.
For noncompete agreements related to the sale of a business, the Law creates time limits during which such restrictions may bind owners who (i) own a minority share of such business and (ii) received their equity as consideration for services. These time limits are calculated by dividing such owners’ proceeds from such a sale by their annualized cash compensation during the preceding two years (or their affiliation with the business if such owner’s involvement with the business is less than two years).
This provision provides clarity with respect to employees and other service providers who receive equity solely as compensation for their services provided, but it may create new confusion for owners holding equity as both capital investment and compensation, or with respect to the applicability of the Law to equity purchased pursuant to employee options or similar rights.
[1] The Law defines “healthcare provider” as “an individual licensed to engage in the practice of medicine, registered to engage in the practice of advanced practice registered nursing, licensed to practice as a certified midwife, or licensed to engage in the practice of dentistry.”
